ETF HQ Report – Everything Continues

December 13, 2010 – 07:45 am EST

The market continued its advance over the last week and the best news is that much of it was backed by strong volume.  Over the last month the advances have been nonstop and over the last 3+ months they have been huge.  Now the question is whether we are due for some profit taking.  Lets take a closer look…

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****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.

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ETF % Change Comparison

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ETF % Change Comparison

For the first time in a while SMH wasn’t one of the top performing ETFs and finished the week off its highs, this is no cause for concern but is interesting to note.  IWM on the other hand had a very strong week and it is always positive to see the small caps leading.

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Learn more – ETF % Change Comparison

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A Look at the Charts

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SPY

New highs and improving volume, you can’t complain about that!

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QQQQ

There looks to be little to sustain the rally on QQQQ so continued strength from SMH is particularly important.

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SMH

After a huge run SMH is very much due for some profit taking, hopefully volume flows remain positive.

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IWM

Strong volume and strong price action – great to see from the small caps.  They are overbought though.

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IYT

The transports look good but currently lack a catalyst for a big move higher over the short term.

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OM3 Weekly Indicator

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OM3 Indicator

‘Strong Buy’ signals remain active across the board.

Learn more – The OM3 Indicator

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TransDow & NasDow

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TransDow & NasDow

The TransDow maintains its position in the Transports as they remain dominant over the Dow.  The NasDow on the other hand has just shifted out of the NASDAQ after two weeks for a 4.06% profit as the Dow has become dominant over the NASDAQ.

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What the TransDow Readings tell us:

The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

What the NasDow Readings tell us:

The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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LTMF 80 & Liquid Q

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LTMF 80 & Liquid Q

LTMF 80 continues to hold QQQQ and is now showing a profit of 13.55%.  Liquid Q remains in cash.

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Historical Stats:

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LTMF 80 & Liquid Q Stats

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How The LTMF 80 Works

LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.

How Liquid Q Works

Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.

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Summary

Everything continues to look good and volume is improving in most areas.  Over the short term however profit taking is a real possibility simply due to the fact that the market (particularly SMH) has become overbought and currently lacks the fuel for a major advance.

Hope you all have a good week, I will be away for most of it on holiday but will be back for Friday’s close.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

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Quote of the Day:

“I’m going to buy hamburgers for the rest of my life.  When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household.  When hamburgers go up, we weep.  For most people, it’s the same way with everything in life they will be buying – except stocks.  When stocks go down, you can get more for your money, but people don’t like them anymore.  That sort of behavior is especially puzzling.” – Warren Buffett

ETF HQ Report – Mostly Fun

December 06, 2010 – 05:15 am EST

It was an exceptional week for the market with massive advances made across the board.  Our long positions were a lot of fun (our largest short in EWJ was not).  Last week we said that if IWM and IYT can break through to new highs then there is still plenty of life left in this bull run.  New highs are exactly what we saw and apart from a continued theme of light volume from some areas there is little bad that can be said.

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****Thanks to all those who referred people to this newsletter over the last week.  The more readers we have the more services we can provide you.

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ETF % Change Comparison

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ETF % Change Comparison

New highs for everyone but DIA with the biggest advances coming from IYT and SMH.  Only bullish signs here.

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Learn more – ETF % Change Comparison

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A Look at the Charts

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SPY

Further advances are likely, the only concern is the continued lack of volume.

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QQQQ

Where SMH leads, QQQQ will follow.  Now please, some volume!

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SMH

The price action from SMH is exceptional and an indication of the strength of this bull.  Still, volume is a concern.

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IWM

We said last week it was time for IWM to make a new high and it is very positive to see the small caps leading again.

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IYT

Transports at a new high backed by volume = healthy market.

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OM3 Weekly Indicator

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OM3 Indicator

14 weeks on a strong buy is statistically very rare but is has also been very profitable.

Learn more – The OM3 Indicator

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TransDow & NasDow

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TransDow & NasDow

Both the Transports and the NASDAQ remain dominant over the Dow which is a positive sign.  The position in the Transports is now showing a profit of 9.52%.

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What the TransDow Readings tell us:

The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

What the NasDow Readings tell us:

The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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LTMF 80 & Liquid Q

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LTMF 80 & Liquid Q

LTMF 80 continues to have an active position in QQQQ and is showing a profit of 12.25%.  Liquid Q remains in CASH.

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Historical Stats:

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LTMF 80 & Liquid Q Stats

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How The LTMF 80 Works

LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.

How Liquid Q Works

Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.

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Summary

We have complained about a lack of volume like a broken record for months now and this continues to be an issue.  Other than that everything looks particularly bullish; the economically sensitive areas of the market are leading and they continue to find new highs.  I expect Transportation to continue to be a leader as it is one area that has good volume to back up its price action.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

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Quote of the Day:

Don’t let the fear of striking out hold you back. – Babe Ruth

ETF HQ Report – Torn

November 29, 2010 – 07:38 am EST

News of a real tragedy came through this week.  Any hope of the 29 trapped miners returning alive was lost after another massive explosion ripped through the Pike Rive Mine.  Times like this really put our own problems into perspective and remind us not to take life for granted.  My thoughts go out to the families who have lost their, fathers, brothers, husbands and sons.  Happy Thanks Giving America, it is a great holiday that you guys celebrate and I know I have so much to be thankful for.

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There have been some further signs of strength in the market over the last week; most notably SMH powering onto a fresh high while SPY declined.  This is exceedingly positive as it shows that investors are not shying away from this more risky and economically sensitive industry despite all the uncertainty across the global landscape at present.

Having said that I find myself torn in writing this weeks report as we currently have a mixed portfolio with the recent addition of some short positions.  Our major short position is in EWJ (Japan) and our major long positions are in QQQQ and IYT.  So while there are many positive signs we are not blindly bullish.

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****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.

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ETF % Change Comparison

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ETF % Change Comparison

Notice how the four more economically sensitive ETFs (SMH, QQQQ, IWM & IYT) are up more over the last week, fortnight, month and from their lows than the comparitively economically stable SPY and DIA?  If times were as bad as the financial media would lead us to believe then we simply would not see this kind of behavior.

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Learn more – ETF % Change Comparison

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A Look at the Charts

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SPY

SPY has weak volume flows (still), a break of $117.50 would weigh heavily in the market.

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QQQQ

This coming week will be important for QQQQ, there are no reasons to sell at present but if it stalls here then a test of $50 is likely.

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SMH

SMH offers the #1 bullish argument.  New highs from this market leading ETF are always a good sign.

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IWM

It is time for IWM to make a higher high because without it the broad market will fail to get much higher.

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IYT

IYT has great volume flows and is very near its recent high.  A higher high confirmed by IWM would be exceptionally bullish.

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OM3 Weekly Indicator

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OM3 Indicator

Buy signals remain active across the board.  The bull alert from SMH is a very positive sign.

Learn more – The OM3 Indicator

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TransDow & NasDow

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TransDow & NasDow

The transportation index remains dominant over the Dow and the TransDow continues to show a small profit from that trade.  The NasDow has just opened a new position in the NASDAQ as it has again become dominant over the Dow.  Historically the market has been most productive under these conditions.

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What the TransDow Readings tell us:

The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

What the NasDow Readings tell us:

The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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LTMF 80 & Liquid Q

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LTMF 80 & Liquid Q

LTMF 80 continues to hold a position in QQQQ while Liquid Q remains in cash.

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Historical Stats:

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LTMF 80 & Liquid Q Stats

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How The LTMF 80 Works

LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.

How Liquid Q Works

Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.

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Summary

The market continues to display great signs of strength but as a recurring theme there is a lack of volume.  While that is to be expected over the Thanks Giving Week, we really need to see volume return to back the bulls.  The time has also come for IWM to make a higher high.  If this occurs and is confirmed by IYT then there is still plenty of life left in this bull run.  If not then we are due for some more substantial profit taking.

Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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Derry

And the Team @ ETF HQ

“Equipping you to win on Wall St so that you can reach your financial goals.”

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P.S Like ETFHQ on Facebook – HERE

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Quote of the Day:

The grateful mind is constantly fixed upon the best. Therefore, it tends to become the best; it takes the form or character of the best and will receive the best. – Wallace Wattles

Double Vs Triple Exponential Moving Average

In this round of testing we are looking at the Double Exponential (D-EMA) and Triple Exponential Moving Averages (T-EMA).  We have already tested the D-EMA and found that it wasn’t as effective as the EMA but wanted to test it over longer periods and compare it to the T-EMA.

In conducting these tests we measured the performance of each indicator going Long and Short, using Daily and Weekly data, taking End Of Day (EOD) and End Of Week (EOW) signals with smoothing periods varying from from 5 – 400 days or 80 weeks.~ These tests were carried out over a total of 300 years of data across 16 different global indexes (details here).

Note – Due to the huge lead in period required for the T-EMA, 240 weeks of data was ‘left in’ on each market.  As a result the average buy and hold annualized return for the test markets was 4.94%.  In our previous tests we only ‘left in’ 104 weeks and the subsequent buy and hold annualized return for the test markets was 6.32%.  For this reason the results for these tests are not directly comparable to our other tests results.  This is also why the returns for the D-EMA displayed below are lower than those previously published.

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Triple and Double Exponential MA Annualized Return

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Above are the return statistics when going long using daily, end of day signals.  As you can see the Triple EMA under performs the Double EMA by a significant margin.  Due to the fact that we have already established that the D-EMA is not worthy of use in a trading system the same can be said for the T-EMA and therefore there is no point in displaying any more statistics for these indicators.  See also – Simple Vs Exponential Moving Averages

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  • ~ An entry signal to go long (or exit signal to cover a short) for each average tested was generated with a close above that average and an exit signal (or entry signal to go short) was generated on each close below that moving average. No interest was earned while in cash and no allowance has been made for transaction costs or slippage.  Trades were tested using End Of Day (EOD) and End Of Week (EOW) signals for Daily data and EOW signals only for Weekly data. Eg. Daily data with an EOW signal would require the Week to finish above a Daily Moving Average to open a long or close a short and vice versa.

    • ETF HQ Report – Signs of Strength

    November 22, 2010 – 02:42 am EST

    A special thought goes out to the 29 trapped miners in Greymouth NZ.  Come home safe boys!!

    There were some really healthy signs from the market over the last week.  First of all there was a bit of profit taking which has eased the overbought situation.  Secondly we saw strength from the Semiconductors (SMH) and the Transports (IYT) which both made their way higher while the broad market finished relatively flat.  This is a great sign and indicates that there is nothing sinister behind the recent profit taking.

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    ****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.

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    ETF % Change Comparison

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    ETF % Change Comparison

    As you can see SMH and IYT are very close to the highs that they set two weeks ago.  Were the market about to reach a major top, in most cases we would see these more economically sensitive areas suffering.

    Learn more – ETF % Change Comparison

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    A Look at the Charts

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    SPY

    Volume remains a concern but the price action is healthy.

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    QQQQ

    Plenty of room for more profit taking from QQQQ but the action from SMH suggests that another breakout is a good possibility.

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    SMH

    The action from SMH is great to see.  If the price breaks out then we really need to see some strong volume.

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    IWM

    IWM has good support around $70, if it can make a new high without seeing lower prices first then this market really is strong.

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    IYT

    The volume behind the transports offers real confidence and suggests that higher prices are on the way, if not immediately then soon.

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    OM3 Weekly Indicator

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    OM3 Indicator

    Buy signals remain active across the board but the bear alerts warn that the weekly cycle continues to weaken.

    Learn more – The OM3 Indicator

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    TransDow & NasDow

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    TransDow & NasDow

    The position in the Transportation index remains active and is now showing a profit of 5.29%.  The NasDow on the other hand has just closed its position in the NASDAQ for a tiny profit as the Dow is now dominant.  This is a sign of weakness as historically most of the markets major declines have occurred while the Dow has been dominant over the NASDAQ.

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    What the TransDow Readings tell us:

    The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

    Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

    What the NasDow Readings tell us:

    The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

    Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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    LTMF 80 & Liquid Q

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    LTMF 80 & Liquid Q

    LTMF 80 maintains its position in QQQQ with a current profit of 9.34%.  Liquid Q has shifted to cash after 21 days and a small profit.

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    Historical Stats:

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    LTMF 80 & Liquid Q Stats

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    How The LTMF 80 Works

    LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.

    How Liquid Q Works

    Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.

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    Summary

    It was a rather uneventful week in the market.  We saw a touch of healthy profit taking and some buying around support.  The good news thought is that we are seeing strength from the more economically sensitive areas of the market.  They fact that they are holding together so well makes it highly unlikely that we are about to see a major market reversal.

    Keep an eye on OBV, if we see a breakout it really needs the backing of solid volume this time.  Also if IWM can breakout to a new high then this will be a further indication of market strength.

    Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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    Derry

    And the Team @ ETF HQ

    “Equipping you to win on Wall St so that you can reach your financial goals.”

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    P.S Like ETFHQ on Facebook – HERE

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    A Prayer for the Tapped Kiwi Miners:

    Almighty and eternal God,
    Protect them with the shield of your strength
    and keep them safe from all evil and harm.
    May the power of your love enable them to return home
    in safety, that with all who love them,
    they may ever praise you for your loving care.
    We ask this through Christ our Lord.

    Amen

    Double (D-EMA) and Triple Exponential Moving Average (T-EMA)

    The Double and Triple Exponential Moving Average were created by Patrick Mulloy and first published in the February 1994 issue of Technical Analysis of Stocks & Commodities magazine – Smoothing Data With Less Lag.  Mulloy stated in his article:

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    “Moving averages have a detrimental lag time that increases as the moving average length increases.  The solution is a modified version of exponential smoothing with less lag time.”

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    Like an EMA, the D-EMA and T-EMA apply more weight to the most recent data in an attempt to smooth out noise while still remaining highly reactive to changes in the data.  This is not achieved by simply double and triple smoothing as one may assume.  To do so results in weighting that resembles a backwards log-normal distribution, rather like a Triangular Moving Average but smooth and shifted forward.  Below you can see how the weighting is allocated by a single, double and triple smoothed exponential moving average compared to a standard EMA and SMA:

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    Double and Tripple Smoothed EMA Weighting.

    As you can see by double and triple smoothing an EMA the weighting no longer focuses on the latest data.  The actual Double and Triple Exponential Moving Average applies the weighing very heavily to the most recent data as illustrated in the chart below:

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    Double and Tripple EMA Weight

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    How To Calculate a Double Exponential Moving Average and T-EMA

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    Double Exponential MA Formula:

    D-EMA = 2*EMA – EMA(EMA)

    Triple Exponential MA Formula:

    T-EMA = (3*EMA – 3*EMA(EMA)) + EMA(EMA(EMA))

    Where:

    EMA = EMA(1) + α * (Close – EMA(1))

    α = 2 / (N + 1)

    N = The smoothing period.

    Here is an example of a 3 period Double Exponential Moving Average and Triple EMA:

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    Double and Triple Exponential Moving Average Formula.

    Triple Exponential Moving Average and D-EMA Excel File

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    We have built a spreadsheet to calculate the D-EMA and T-EMA and have made it available for free download.  Find the file at the following link near the bottom of the page under Downloads – Technical Indicators: Double (D-EMA) and Triple Exponential Moving Average (T-EMA).

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    Double EMA, Triple EMA and a Simple Moving Average

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    Double and Tripple EMA Vs a Simple MA.

     

    Double and Triple Exponential Moving Average Test Results

     

     

    We ran them through tests through over 300 years of data across 16 different global markets.  Here are the results:

    Double Exponential Moving average Vs Simple and Exponential Moving average

     

    Double Vs Triple Exponential Moving Average

     

    More in this series:

    We have conducted and continue to conduct extensive tests on a variety of technical indicators.  See how they perform and which reveal themselves as the best in the Technical Indicator Fight for Supremacy.

     

     

    ETF HQ Report – Healthy So Far

    November 15, 2010 – 06:55 am EST

    After a two and a half month relentless drive higher, finally, the market has experienced some tangible profit taking.  This is both healthy and well over due.  So far the pull back has been small and controlled but it is important that it remains this way and hopefully with relatively light volume.  Lets take a closer look…  But first, a hilarious and regrettably accurate explanation of Quantitative Easing:

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    ****Thanks to all those who referred people to this newsletter over the last week. The more readers we have the more services we can provide you.

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    ETF % Change Comparison

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    ETF % Change Comparison

    All of the influential ETFs finished the week down about 2% although SMH saw the smallest declines and is still up a huge 7.65% over the last month.  If we continue to see profit taking and SMH remains comparatively strong then this would be an extremely bullish sign.

    Learn more – ETF % Change Comparison

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    A Look at the Charts

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    SPY

    A test of $117 is highly likely but a loss of support is not a concern as long as QQQQ holds strong.

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    QQQQ

    A test of $50 would be fine as long as SMH holds onto $29.

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    SMH

    With this rally built on weak volume SMH must hold onto $29 or we will enter the danger zone (again).

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    IWM

    IWM has so far failed at resistance and has very poor volume flows.  Keep in eye on the small caps as a break down here could spook the broad market.

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    IYT

    With strong volume behind the Transports they offer real backing to the long term bullish argument.

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    OM3 Weekly Indicator

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    OM3 Indicator

    The buy signals remain active although they are statistically old.  The bear alerts warn that the weekly cycle is in decline.

    Learn more – The OM3 Indicator

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    TransDow & NasDow

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    TransDow & NasDow

    The Transportation index and NASDAQ remain dominant over the Dow which is a positive sign.  Small profits remain on both trades but those profits could quickly disappear with a little more profit taking.

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    What the TransDow Readings tell us:

    The TransDow measures dominance between the DJ Transportation Index (DJTI) and the Dow Jones Industrial Average (DJIA). In a strong market the more economically sensitive Transportation Index should be dominant over the DJIA.

    Historically the DJTI has been dominant over the Dow 45% of the time. The annualized rate of return from the DJTI during this period was 18.47% with the biggest loss for one trade sitting at -13.27%. The annualized return from the DJIA during the periods it was dominant over the DJTI was just 4.06% and the biggest loss for one trade was -16.13%. A 4% stop-loss is applied to all trades adjusting positions only at the end of the week.

    What the NasDow Readings tell us:

    The NasDow measures dominance between the NASDAQ and the DJIA. Using the same theory behind the Trans Dow; in a strong market the more economically sensitive NASDAQ should be dominant over the DJIA.

    Historically the NASDAQ has been dominant over the DJIA 44% of the time. Taking only the trades when the NASDAQ is above its 40 week moving average the annualized rate of return was 25.47% with the biggest loss for one trade sitting at –8.59%. The annualized rate on the DJIA during the periods it was dominant over the NASDAQ is just 8.88% and the biggest loss for one trade was –12.28%. A 8% stop-loss is applied to all trades adjusting positions only at the end of the week.

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    LTMF 80 & Liquid Q

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    LTMF 80 & Liquid Q

    Both LTMF 80 and Liquid Q maintain active positions in QQQQ.

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    Historical Stats:

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    LTMF 80 & Liquid Q Stats

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    How The LTMF 80 Works

    LTMF stands for Long Term Market Forecaster. It reads volume flows relative to price action and looks for out performance of volume measured on a percentage basis over the prior 12 months. During a sustained rally the readings will reach high levels (near 100%) making it imposable for the volume reading to always outperform price so any reading above 80% will maintain the buy signal. This system has outperformed the market over the last 10 years but performance has been damaged by some nasty losses. It only produces buy signals and only for QQQQ.

    How Liquid Q Works

    Liquid Q completely ignores price action and instead measures the relative flow of money between a selection of economically sensitive and comparatively stable ares of the market. It looks for times when the smart money is confident and and can be seen by through volume investing heavily is more risky areas due to an expectation of expansion. This system has outperformed the market over the last 10 years and remained in cash through most of the major declines. It only produces buy signals and only for QQQQ. We will provide more performance details on the web site for these systems soon.

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    Summary

    The profit taking we have seen so far is healthy and there is room for plenty more before causing any damage.  The key moving forward will be to observe the nature of any further declines.  If we see light volume plus SMH and QQQQ holding onto support then we will soon have another great buying opportunity.  If not then we must be ready to lock in what is left of the profits from the recent rally.

    Any disputes, questions, queries, comments or theories are most welcome in the comments section below.

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    Derry

    And the Team @ ETF HQ

    “Equipping you to win on Wall St so that you can reach your financial goals.”

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    P.S Like ETFHQ on Facebook – HERE

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    Quote of the Day:

    “Identify your highest skill and devote your time to performing it.  Delegate all other skills.” – Ronald Brown

    Triangular Simple Moving Average (TriS-MA)

    The Triangular Simple Moving Average (TriS-MA) is almost identical to the Triangular Weighted Moving Average but is very different in how it is calculated.  Instead of weighting the data points directly it is a double smoothed simple moving average (a moving average of a moving average).  Because most of the weight ends up being placed on the data in the middle of a series the weighting looks like a triangle, hence the name.  Below you can see how the weighting is applied to a 50 period TriS-MA, EMA and SMA:

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    Triangular Simple MA vs SMA and EMA Weighting.

    How To Calculate a Triangular Simple Moving Average

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    TriS-MA = SUM(MA1,L) / L

    Where:

    MA1 = SUM(CLOSE,L) / L

    L = ceiling((n+1) / 2)

    n = Number of Periods

    Here is an example of a 3 period Triangular Weighted Moving Average:

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    How to Calculate a Triangular Simple Moving Average

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    Triangular Simple Moving Average Excel File

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    An Excel Spreadsheet containing a Triangular Weighted Moving Average is available for FREE download.  It contains the ‘basic’ version you can see above and a ‘fancy’ one that will automatically adjust to the length you specify.  Find it at the following link near the bottom of the page under Downloads – Technical Indicators: Triangular Weighted Moving Average (TriW-MA).  Please let us know if you find it useful.

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    Triangular Moving Average and a Simple Moving Average

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    50 Day Triangular Simple MA and Simple MA.

    Test Results

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    We tested several different types of Moving Averages including the TriS-MA through 300 years of data across 16 global markets to reveal which is the best and if any of them are worth using in your trading – see the results.

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    Mixed Moving Averages – Test Results

    In this round of testing we will be looking at a mix of different smoothing methods and averages:  The Moving Linear Regression or Time Series Forecast (TSF) and The Linear Regression Indicator (LRI) which aren’t actually moving averages but can be used in the same way.  Plus Wilder’s Smoothing AKA Smoothed MA (WS-MA) and the Triangular Simple MA (TriS-MA).  The aim is to identify if any of these indicators are worth using as a trading tool.

    We tested each indicator going Long and Short, using Daily and Weekly data, taking End Of Day (EOD) and End Of Week (EOW) signals with smoothing periods varying from from 5 – 300 days or 60 weeks.~ These tests were carried out over a total of 300 years of data across 16 different global indexes (details here).

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    Annualized Return Mixed Moving Averages

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    Above you can see the annualized return statistics for each indicator.  The first thing that you will notice is that the LRI and TSF produce very similar results and neither of them are very good.  So for providing buy signals in this fashion the Time Series Forecast and The Linear Regression Indicator are knocked out cold in the first round.

    The returns generated by the TriS-MA are reasonable but they are not good enough to out perform the EMA’s results so the Triangular Simple Moving Average is also knocked out of contention.  (Note – It didn’t dawn on us that the TriS-MA is almost identical to the Triangular Weighted Moving Average until after we had already tested it).

    Wilder’s Smoothing produced some good returns when the smoothing period was less than 45 days but the performance dropped gradually to almost 7% as the length was extended.  The EMA exhibited similar behavior but bottomed out around 8% so while Wilder’s Smoothing is effective in this application, the Exponential Moving Average is still King.
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    Best Average of the Group – Long

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    We performed a total of 948 tests in this round; half of them on the long side and half on the short.  Rather than simply selecting the indicator with the greatest returns over the test period we identified the best for going long using the following criteria:

    • Annualized Return > 9%
    • Average Trade Duration > 29 Days
    • Annualized Return During Exposure > 15%
    • Annualized Return on Nikkei 225 > 3%

    14/357 Averages made the final cut (see spreadsheet) but we selected the 30 Day Wilder’s Smoothing with End of Week Signals as the ultimate winner:
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    30 Day WS-MA, EWO Long.

    Above you can see how the 30 Day WS-MA, EOW Long performed during the test period compared to the 75 Day EMA, EOW Long which was selected as the most effective Exponential Moving Average in a previous test.  The WS-MA with this particular smoothing period produced almost identical results to the EMA but didn’t offer any benefits.

    Upon further testing we found that despite very different calculation the WS-MA and the EMA are actually the same indicator.  Simply double the WS-MA period and subtract one to find the equivalent EMA.  For instance a 38 period WS-MA is identical to a 75 period EMA.

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  • ~ An entry signal to go long (or exit signal to cover a short) for each average tested was generated with a close above that average and an exit signal (or entry signal to go short) was generated on each close below that moving average. No interest was earned while in cash and no allowance has been made for transaction costs or slippage. Trades were tested using End Of Day (EOD) and End Of Week (EOW) signals for Daily data and EOW signals only for Weekly data. Eg. Daily data with an EOW signal would require the Week to finish above a Daily Moving Average to open a long or close a short and vice versa.
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  • – The average annualized return of the 16 markets during the testing period was 6.32%. The data used for these tests is included in the results spreadsheet and more details about our methodology can be found here.

    • Exponential Moving Average (EMA)

    The Exponential Moving Average (EMA) is a very popular method for smoothing data in an attempt to eliminate noise and our tests show that it is also highly effective.  Unlike the Simple Moving Average (SMA) that applies equal weight to all data, the EMA applies more weight to the recent data so that it reacts faster to sudden changes.

    You can see see why it is called an Exponential Moving Average when you look at how the weighting is applied; it is in the shape of an exponential curve.  Because of this the weighting never reaches zero and the influence of early data always remains (although it has little effect outside of the specified smoothing period).  This is more clearly illustrated by the chart below which shows the weighting for a 50 period EMA and a SMA:

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    Weighting - Exponential Moving Average and a SMA.

    Although we call it a 50 period EMA, those 50 periods only actually account for 86% of the weighting.  A further 12% is applied over the preceding 50 periods leaving the last 2% to be spread amongst all the prior data.  Here is a great article from MarketSci on this topic: Visual Depiction of SMA vs EMA Weighting

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    How To Calculate an Exponential Moving Average

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    Calculating an Exponential Moving Average actually requires less processing power than a Simple Moving Average because it only refers to the current period and the previous EMA value.  While it does not become active until the Nth period the EMA starts with the first close price and after that is calculated according to the following formula:

    EMA = EMA(1) + α * (Close – EMA(1))

    Where:

    α = 2 / (N + 1)

    N = The smoothing period.

    Here is an example of a 3 period Exponential Moving Average:

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    How to Calculate an Exponential Moving Average

    If you have two data sets and you wish to find out the EMA smoothing period, the following formula will reveal it:

    N = (2-( (MA-MA[1]) / (Close-MA[1]) ) ) / ( (MA-MA[1]) / (Close-MA[1]) )

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    Exponential Moving Average Excel File

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    The EMA is so simple to calculate that it is unlikely that you would need a version in Excel but we have put together one for those of you that are lazy :).  It is free and contains the ‘basic’ version you can see above and one that will automatically adjust to the length you specify.  Find it at the following link near the bottom of the page under Downloads – Technical Indicators: Exponential Moving Average (EMA).

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    Exponential Moving Average and a Simple Moving Average

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    Exponential Moving Average vs Simple MA.

    Test Results

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    If you haven’t already then check out the EMA test results.  We tested it against the SMA and D-EMA through 300 years of data across 16 global markets to reveal which is the best and the characteristics they exhibit as their smoothing period is changed.  See the results; Moving Averages – Simple vs Exponential

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